Interview with the CEO Stéphane Ulcoq

HOW WOULD YOU SUMMARISE UBP GROUP’S PERFORMANCE FOR FY 2016-17?

Our results for this financial year can best be characterised as satisfactory, with revenues increasing across some lines of business, and decreasing in others. Although the construction sector experienced a zero-growth rate in 2016, it has gradually recovered from a situation of negative growth over the past five years to a forecasted positive growth of 7.5% for calendar year 2017.

DEAR SHAREHOLDER

I am pleased to present to you the Annual Report of The United Basalt Products Limited (‘UBP’) for the financial year ended June 30, 2017, which provides insights into this year’s outcomes, the overall health of the construction industry, and our action plan to connect resources to our highest-priority initiatives going forward.

THE STATE OF THE LOCAL CONSTRUCTION SECTOR

The past five years were marked by a sharp slowdown and a degree of uncertainty for the industry with the public and private sectors holding off megaprojects, resulting in heightened competition. Following a slow recovery period, industry growth is expected to rebound from 0% in calendar year 2016 to 7.5% this year due to major investments in public infrastructure projects. Likewise, the GDP rate at current market prices is forecasted to increase from 3.8% for calendar year 2016 to 3.9% for 2017. These indicators are promising for both the construction industry and the economy at large, although some delay is being experienced in the launching of the announced major infrastructure projects.

ACHIEVED PERFORMANCE AND VALUE CREATION

The Group’s revenue for the year ended June 30, 2017 was maintained at Rs 2.6 billion, while net profit increased from Rs 158.1 million (FY2015-16) to Rs 171.6 million for the financial year under review. Despite not attaining the financial objectives we set due to exceptional events impacting our dry mortar, agriculture and Malagasy subsidiaries, our overall performance was satisfactory.

The ability to generate positive results under favourable circumstances is, to a certain extent, expected. However, producing positive results in times of uncertainty is indicative of a robust financial standing and an efficient strategy. For the financial year under review, we have fulfilled our mission of creating shareholder value by generating Rs 6.02 as earnings per share, a 17.1% increase in comparison to FY2015-16 (Rs 5.14), and distributing Rs 3.25 as dividend per share, a slight increase from the previous year (FY2015-16: Rs 3.00). Our share price increased by 38.6% to Rs 115.00 at June 30, 2017 (FY2015-16: Rs 83.00) while the SEMDEX increased by 21.1% during the same period.

At the time of writing, our share is quoted at Rs 118.50. Since being listed on the Stock Exchange of Mauritius Ltd (‘SEM’) in 1989, the Company has had a longstanding track record of consistently yielding returns for its shareholders, regularly ranking in the SEM’s top ten value-creators based on annualised shareholders’ return.

In terms of financial position, our land and buildings were revalued during the year. Our Net Assets Value (NAV) per share increased from Rs 99.26 in 2016 to Rs 118.10 this financial year-end, while our debt to equity ratio improved from 0.39 to 0.35 times despite an increase in short-term borrowings required to finance our punctual working capital needs.

A RESPONSIBLE ORGANISATION

Although our business is usually associated with aggregates, cement and blocks, our biggest asset since our inception has been our people. The particular attention we pay to our people reflects our endeavour to shift away from a short-term way of thinking and concentrate on the long-term value creation. Our organisation comprises of some 1,200 employees, to whom we distributed half of the total wealth created during the financial year under review.

We have a moral imperative to ensure that each and every employee feels empowered. Human Capital presents a value- creating investment when the appropriate resources are deployed. We have therefore chosen to put People first in this year’s annual report, in recognition of our employees, as well as all those who are impacted by the Company: customers, suppliers and society.

As a responsible organisation, we are committed to maintaining high standards of corporate governance and business practices. Transparency and integrity are key components in enhancing investor confidence in the Group. In this regard, we have set up a work plan to progressively implement the principles of the new National Code of Corporate Governance 2016.

COMMITTING TO SOCIETAL CHANGE

Our commitment to impacting the lives of underserved communities is reflected in how we approach Corporate Social Responsibility (‘CSR’). We ensure we deploy our resources effectively, and devote considerable time and effort to organisations whose causes are aligned with our values. Our CSR Committee inspires community- wide engagement and participation, fostering lasting relationships with the people we reach out to.

The new CSR framework disregards the way an organisation chooses to engage with the Mauritian society. Allocating a high percentage of CSR funds to the National CSR Foundation through the MRA disconnects philanthropic activities and CSR from the company’s beliefs and strategy. I firmly believe that external engagement cannot be separated from everyday business.

GOING FORWARD

Since July 2017, our revenue trend on the local core business market denotes an appreciable increase over that of the same period in previous year. The forecasts for the construction industry and current economic context are promising. After a five-year hiatus, industry growth is picking up : investment in public infrastructure is fast-growing, demand is on the rise, and the Government has taken measures to stimulate the economy and boost our sector. Internationally, the Board is concerned by the difficulty of conducting business in Sri Lanka, and is therefore seriously reconsidering our presence there.

The corporate landscape is changing and Integrated Reporting is becoming the norm. For the financial year 2017-18, we will focus on reporting on all aspects of our organisation’s performance and value creation story.

APPRECIATION

I am grateful for the support and wise counsel of my fellow members of the Board. On behalf of the Board of Directors, I would like to thank the Chief Executive Officer, Stéphane Ulcoq, the Management and all our employees for their commitment and hard work.

I would like to conclude by thanking our partners, stakeholders, customers and suppliers for their contribution to the success of our Group over the years.

MARC FREISMUTH

Chairman

How would you summarise UBP Group's performance for FY 2016-17?

Our results for this financial year can best be characterised as satisfactory, with revenues increasing across some lines of business, and decreasing in others. Although the construction sector experienced a zero-growth rate in 2016, it has gradually recovered from a situation of negative growth over the past five years to a forecasted positive growth of 7.5% for calendar year 2017.

Domestically, we have fared well. We have strengthened our market share in our core business segment, which speaks for the quality of our materials and our capacity to meet the demands of our customers. Aggregates sales to the private-dwelling’s market improved while blocks sales to both residential and non- residential projects were up compared to previous year. However, our overall performance was, in part, negatively impacted by an unexpected setback at Dry Mixed Products Ltd (Drymix), our subsidiary specialised in ready-to-use dry mortar. The installation of new high-tech machinery was delayed and disrupted our production for several months. This resulted in a loss of revenue and a significant drop in performance, on account of the increased production costs incurred to restore the situation and catch up on market demand.

In parallel, the pace of growth in our overseas subsidiaries has been lacklustre. We recorded lower revenues, and earnings were substantially down. The situation in Sri Lanka was, once again, punctuated with the on-going challenge of renewing our crushing permit. Despite our active efforts to counter this issue, Sri Lanka’s complex network of regulations and permits has caused our project to fall behind schedule by nearly two years now. We consider this as a serious problem - one we are addressing diligently. In Madagascar, we incurred higher losses than in the previous year, primarily due to higher production costs and year-end inventory adjustments. Although political uncertainty and a less-than- desirable business climate still prevail, we have managed to stay afloat. In view of the above, the investments by UBP in overseas subsidiaries were impaired by Rs 93 million and disclosed as part of administrative expenses in the statement of profit or loss and other comprehensive income for the year, with no impact on the Group’s figures as these relate to subsidiary companies.

This year has been pivotal for our retail segment, with Espace Maison’s performance exceeding expectations despite the impact of a significant debtors provision. A combination of the right strategy, high-performing management and a strong synergy between our teams has been conducive to generating positive results, particularly amid a fierce competitive landscape. I am pleased with the milestones we have achieved.

Finally, our agriculture segment experienced a substantial increase in revenue, mainly attributable to our vegetable-growing activity. However, our net result was adversely impacted by an impairment of our bearer biological asset attributable to an anticipated drop in the price of sugar and a significant reduction in the area of sugarcane cultivation going forward.

We also witnessed a massive turnaround in the revenue and results generated by our pre-mixed concrete associate compared to the previous year, whose results had been impacted by a significant bad debt write-off and restructuring costs.

Which figures best highlight UBP Group’s FY2016-17?

At first glance, the results for FY2016-17 may seem disappointing as we fell short of our financial objectives. But despite the challenges faced by Drymix and our foreign subsidiaries, we must remember to look beyond the figures and shift our attention to the strides we made in several key areas.

The Group generated revenues of Rs 2.6 billion, almost identical to that of the previous year. Our operating profit dropped from Rs 254.3 million to Rs 217.2 million, largely attributed to the poor performance of our dry mortar, agriculture and foreign subsidiaries. Conversely, the operating profit of our retail Espace Maison activities increased by 9.2% to Rs 31.5 million despite a slight drop in revenue and an increase of Rs 9.6 million in debtors provision. On yet another positive note, the drastic improvement in our ready-mixed concrete associate prompted a profit of Rs 34.3 million, compared to a loss of Rs 6.4 million the previous year. Hence, the Group’s net profit increased from Rs 158.1 million in FY2015-16 to MUR 171.6 million for the financial year under review.

These figures, albeit lower than anticipated, are not worrying as they were caused by exceptional circumstances.

After taking into consideration the share attributable to non- controlling interests, the Group’s Earnings Per Share (EPS) increased from Rs 5.14 in the previous year to Rs 6.02 this year. Consequently, an increased Dividend Per Share (DPS) of Rs 3.25 (FY2015-16: Rs 3.00 per share) was declared and paid by the Company for the financial year under review.

With regards to our financial position, our total assets increased from Rs 4.3 billion at June 30 2016 to nearly Rs 5 billion this year- end, our total liabilities increased from Rs 1.6 billion to Rs 1.8 billion while the equity attributable to shareholders of the parent company increased from Rs 2.6 billion to Rs 3.1 billion. Our land and buildings were revalued at June 30, 2017, thereby generating a surplus of Rs 446.2 million while the total investment in property, plant and equipment increased from Rs 257.9 million in 2016 to Rs 300.7 million for the year under review. Our borrowings increased by Rs 91.4 million to Rs 1.1 billion during the year due mainly to a rise in short-term borrowings required to finance punctual working capital needs. Despite this, our debt to equity ratio moved from 0.39 times in 2016 to 0.35 times this year while our Net Assets Value (NAV) per share increased from Rs 99.26 to Rs 118.10.

Looking back on FY2016-17 - what were the major accomplishments that marked the year?

In light of a challenging situation overseas and despite operating in a volatile sector that is highly dependent on the economic climate, we have managed to remain consistently focused on areas that we can control, ensuring that our business remains financially, socially and environmentally sustainable. Moreover, increasing our market share in our core business locally is reflective of our position vis- à-vis our competitors. This was made possible by a successful Customer Loyalty Scheme, which allowed us to foster a stronger relationship with our existing clients. Furthermore, the increase in Espace Maison’s profitability is a sign of sound management and successful strategy.

With respect to our development projects, we have made steady progress. Locally, our achievements in our core business comprise the renewal and upgrading of our main production plants, Drymix included, with the aim of increasing their capacity and efficiency with latest-technology machinery. We carried out these initiatives in anticipation of the expected growth in demand for our products.

We also invested massively to sustain our quarrying operations and improve our customer service. Our accomplishments in our retail segment were marked by a complete refurbishing and relooking of our shops. More attractive displays and a customer- centric approach have been key in enhancing our customers’ shopping experience. Finally, our agriculture segment also experienced notable achievements. We implemented a VRS plan for our sugar activities in view of reducing losses going forward, while significantly increasing our vegetable-growing and leisure activities in line with our diversification strategy.

The construction industry is said to be among the least digitised. How does digital transformation affect the Group?

While most other industries have embraced tremendous innovations over the past few years, the construction sector has been slow to exploit digital opportunities. At UBP Group, we are rapidly catching up. I strongly believe that there is no alternative to digitisation and that its long-term benefits are significant. As projects grow in scale and complexity, traditional practices must evolve. That being said, the secret to making digitisation effective is knowing what to digitise and what not to. It entails deploying the right strategy, rather than simply adopting all the latest technologies. Our Open Innovation Programme (outlined below) can best attest to our digitisation strategy.

The Open Innovation Programme’s aim is to automate all processes using the latest technology. What is the outcome of this programme?

Our Open Innovation Program consists of putting in place measures to unlock the potential of the digital era. By improving and optimising our processes, our goal is to help our teams work to their full potential. We launched an efficient Intranet system to foster open communication between all employees. With information more easily and readily available, we estimate that it will save employees minutes each day, which, in the long run, equals to saving days in productivity gains. Automating our delivery service has been particularly beneficial for our customers. By simply regulating, automating and optimising manual processes, our customers save valuable time otherwise spent queuing up. In our quest to continue equipping our teams with the tools to succeed, our employees were provided state-of-the-art technology aimed at improving customer service, and the majority of our sites were provisioned with WiFi.

Around the world, retail commerces are migrating online. What do you have in store for Espace Maison?

Today, having a digital presence is essential. Our Facebook page is more and more visited. Moreover, we are witnessing a shift in people’s buying habits with an increasing number of online shoppers across the island. With this, loyalty programmes have also evolved - customers no longer carry their cards in their wallets. Naturally, it made sense for us to digitise our loyalty programme through a mobile application, which is currently being fine-tuned. The goal is to make shopping with Espace Maison a hassle-free, convenient experience and to enable our loyal customers to earn points, which they can redeem to earn discounts or rewards. It should also enable us to fully leverage consumer data and therefore gain a deeper understanding of our customers’ habits and needs.

Product innovation is, in your sector, key to maintaining a competitive edge. How does UBP tackle Research & Development?

In an industry where our product is rarely differentiated from that of our competitors, staying ahead of the curve through innovation is key in driving our competitiveness. UBP therefore dedicates significant time and resources to Research & Development (‘R&D’) across several areas. Our R&D department is tasked with identifying opportunities and threats, and developing solutions accordingly. Embedding innovation in our processes has allowed us to considerably reduce costs, and simultaneously increase the reliability of the construction process. Beyond these functions, the R&D department plays a vital role in educating a relatively conservative market on the various benefits of using ‘Smart Blocks’ - they are value-added products aimed at eliminating the use of shuttering and other related materials, and are therefore environmentally-friendly. Our pedagogic role is achieved by collaborating with the University of Mauritius and the Mauritius Institute of Training and Development (MITD). Our Ecole des Maçons programme at Drymix, which develops skills in construction techniques for beginners, apprentices and experienced builders alike, also aims to elevate the construction industry through education. This collaboration allows us to train many masons both in theory and practice for an optimal utilisation of our products. But most impactful of all is convincing the authorities to instill guidelines in a sector that lacks and

"A strong corporate culture that puts its employees first"

necessitates proper regulation. We identified a gap of regulations, and have taken it upon ourselves to initiate a national platform which brings together all actors of the construction sector: Institution of Engineers Mauritius (IEM), architects and other professionals of the industry. Our aim is to enforce standard norms and good practices adapted to our country, which, if adhered to, will help improve the construction techniques.

This sector, along with the textile and agricultural industries, is no longer appealing to today’s youth. What measures is UBP taking in terms of strategy, initiatives or corporate culture, to attract the youth to construction?

Though our sector may seem unattractive to today’s youth, UBP prides itself on having fostered a strong corporate culture that puts its employees first. Each aspect of our business comes down to our People, and we invest significant time understanding their fundamental needs. Our culture begins with creating an environment that is supportive of our employees’ wellbeing within the workplace. To this end, we have invested heavily in Project Care, which involved rehabilitating all common spaces (mess rooms, shower areas) for a more relaxed environment for our workers. Our ‘Cellule de Bien-Etre’ (Welfare Committee) is responsible for ensuring that our employees achieve work- life balance by organising activities designed to spread positive energy: sports days, bi-annual get-togethers, literacy classes, an in-house psychologist... A fully-equipped gym and a nursery - the first of its kind to exist on the island - are also at their exclusive disposal, free of charge, every day except Sundays. Our employees are engaged and taken care of year-round. As part of our efforts to help employees grow in their roles, we provide training courses intended to hone their skills and provide opportunities for career development. Together, these initiatives have allowed us to create a motivated and committed workforce, with whom we have established an authentic relationship. Besides, 2018 will mark a major milestone in the Group’s longstanding history - our 65th year of existence. While much has evolved on this journey, we have never lost sight of our dedication to our citizens’ prosperity and our country’s growth. As local builders with national reach, and one of the country’s pioneers in construction, we are deeply rooted in each and every Mauritian’s life. And this is what makes us an employer of choice.

What are your priorities for next year?

Our overall performance for the FY2016-17 indicates an improvement over the previous year, and is set to further progress as public and private megaprojects are being implemented. With the Government planning to inject billions in infrastructure projects over the years to come - the Road Decongestion Programme, the Metro Express and the Port Master Plan - the sector is projected to grow by 7.5% in 2017, assuming the launching of these works isn’t further delayed. Concurrently, the private sector is setting in motion major developments, namely the construction of several Smart Cities, which will invariably demand a steady supply of construction materials. The beginning of FY2017-18 is rich in opportunities for UBP Group.

During the course of the FY2017-18, we will continue to focus on improving profitability which, as this year’s performance demonstrates, can best be achieved by optimising our resources and controlling our costs. Most of our growth opportunities are organic: on the local front, we intend to continue building on the momentum we have achieved at Espace Maison with the opening of a sixth retail store in the South, coupled with an improved IT system to upgrade the customer experience. We are also set to reveal a fresh and inventive website beginning 2018, which will showcase our innovative and differentiated strategy. I am confident that it is a division that will generate sustainable growth. We will also continue developing our diversification strategy for ‘Gros Cailloux’, both in our agricultural and leisure activities.

Internationally, we are much concerned about our below- expectation performance of our Zambian investment. We aim to reverse the situation there, in Sri Lanka, Madagascar and East Africa by pursuing a strategy that favours strategic alliances and management contracts rather than greenfield projects. By sharing knowledge, expertise and expenses with major players, we will be able to better tap into these markets without experiencing significant financial impact.

Above all, we will continue to innovate. We see significant potential in investing in innovative machinery in view of increasing our existing plants’ production capacity. We will further embed innovation in our marketing strategy to enhance the synergies between our entities, with the ultimate goal of offering an A to Z service. To that end, we are currently working towards the creation of a Group identity.

We remain cautiously optimistic about the short-term macroeconomic outlook, and confident regarding our long-term potential locally and in our overseas subsidiaries. At the same time, we are continuously seeking new growth opportunities.

Is there a final message you would like to share?

I would like to end this interview by expressing my gratitude to all our employees. On behalf of the Executive Management Team, I extend a warm thank you for your efforts. Your talent, hard work and dedication have allowed us to navigate a challenging landscape and deliver on our commitments.

To the Board, thank you for your unwavering counsel and guidance in leading us forward.

Last but not least, I am grateful to each one of our shareholders, partners and customers. We value your continued support, loyalty and confidence in our Group.